REITs vs. Stocks: Investment Guide

When building your investment portfolio, understanding the differences between REITs and stocks can significantly impact your financial future. Real Estate Investment Trusts (REITs) offer investors a way to add real estate to their portfolios without directly purchasing property, providing steady income through dividends and potential appreciation. Traditional stocks, meanwhile, represent ownership in companies across various industries, offering growth potential and sometimes dividends. Each investment vehicle comes with its risk profile, tax implications and performance characteristics that savvy investors should carefully consider.

Working with a financial advisor can help you determine what allocation of stocks and REITs fits your goals, timeline and risk profile.

What Are REITs?

A real estate investment trust, or REIT, is a company that holds and often manages various real estate investments. REITs are funded by investors’ pooled funds, who are able to buy into the REIT by purchasing shares.

REITs function similarly to mutual funds but for real estate. They pool capital from numerous investors, making it possible for individual investors to earn dividends from real estate investments without having to buy, manage, or finance properties themselves. By law, REITs must distribute at least 90% of their taxable income to shareholders annually in the form of dividends, making them attractive for income-focused investors.

There are several types of REITs available to investors. Equity REITs own and manage income-producing real estate, while mortgage REITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities. Hybrid REITs combine the investment strategies of both equity and mortgage REITs. Additionally, investors can choose between publicly traded REITs listed on major stock exchanges, public non-traded REITs or private REITs.

How REITs and Stocks Are Similar

For some investors, REITs may represent the best of both worlds, as these investments combine the simplicity of stocks with the growth potential of real estate. REITs behave very similarly to stocks in many ways.

Both are sold as shares to investors: Investors who want to buy into a specific company do so by purchasing shares, which is simply a small portion of that company’s ownership. The capital generated by investors can be used by the company for a variety of purchases. With REITs, investors also buy in by purchasing shares. The capital generated is used to fund that company’s real estate portfolio. This may mean purchasing, renovating, managing or maintaining those properties.
Both can be publicly or privately traded: Companies can choose to remain privately held or trade their stocks on a public exchange. The same goes for REITs, which can be publicly-traded, privately-traded or even non-traded. The risk and liquidity for each investment vary depending on whether the stock is privately or publicly traded.
Both can be key parts of your portfolio: Though a more volatile (and risky) investment, stocks can play an important role in an investment portfolio’s success, potentially encouraging portfolio growth and boosting its value. They also allow investors to put their money to work within companies and industries that are important to them personally. REITs do the same thing. They enable investors to invest in real estate while also mitigating loss, allowing them to put their money to work in real estate without shouldering all of the risk. By adding REITs to a portfolio, investors are also able to diversify their investments, helping to hedge against market downturns and inflation.

How REITs and Stocks Differ

Of course, there are also some key differences for investors to keep in mind when it comes to investing in REITs or investing in stocks.

REITs focus on real estate: As the name states, REITs are real estate-based investments. This may make them an attractive option for investors looking to put their money in the real estate market, without the risk of buying and managing property. Individual stocks, however, can fall into a wide range of categories. Stocks allow investors to choose certain industries – and even specific companies – which may or may not relate to real estate.

Stocks offer more personalization and control: Because stocks enable investors to buy shares of any publicly-traded company, they are a very customizable investment. You can buy shares of your favorite apparel brand, your favorite social media platform or even your favorite movie theater company … whenever you want. REITs, on the other hand, represent a collection of real estate investments. Investors don’t have a say in the investments held within the REIT or how they are managed.

REITs must pay dividends: Investors may receive periodic payouts, called dividends, after certain investments recognize growth. Dividends may be offered by stocks, mutual funds or even exchange-traded funds (ETFs). These bonus funds can be withdrawn and used for other purposes or even reinvested back into the investor’s portfolio. Not all investment stocks pay out dividends, and the value of the dividends received may vary. Dividends are required of REITs, though.

REITs vs. Stocks: Which is Better?

As with most financial topics, choosing between REITs and stocks is a very personal decision. If you are interested in a real estate investment that is reliable, hands-off and offers dividends, REITs could be the answer. If you’re looking for a higher-risk-but-high-potential investment or want to be able to invest in specific companies you admire, buying individual stocks could be the answer.

With that said, it’s always wise to diversify your portfolio; in many cases, this might mean purchasing both stocks and REITs.

A well-diversified portfolio helps investors personalize the experience and find the investments that pique their interest the most. It also helps to invest in a variety of different industries, investment types and risk tolerances. This enables investors to mitigate risk, hedge against market downturns and even help balance out future inflation losses.

Bottom Line

The ideal approach for most investors is to incorporate both asset classes into a well-balanced portfolio. This strategy allows you to benefit from the income stability of REITs while capturing the growth potential of stocks. Your specific allocation should align with your financial goals, risk tolerance, and investment timeline. Remember that successful investing requires ongoing education and periodic portfolio reviews.

Tips for Investing in REITs vs. Stocks

Choosing between stocks and REITs or choosing how much of each to buy isn’t the only decision investors face. And sometimes you need perspective, advice and expertise, which is where a financial advisor comes in. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Be sure to take periodic advantage of a calculator to determine an ideal asset allocation and then engage in passive investing strategies.